By Mark Pierce, Esq.
Our DAO LLC service is fast, reliable, and unlike many of competitors, we charge a one-time fee for our services. This means no recurring or stake in your DAO is required to create everything you need to get started in the DAO LLC space.
If you aren't sure whether a DAO LLC is right for you, keep reading or read our general article on DAO's to get up to speed. You can also contact us with any questions, we'd love to help you create the perfect entity for your individual situation.
A Decentralized Autonomous Organization (DAO) is an organization in which decisions for the organization are made by members or an algorithm. Rules are created during the initial creation of the DAO, where stakeholders invest funds in the DAO in exchange for more control of the DAO and a larger share of the DAO’s profits. Although the creator of a DAO typically participates in the DAO as a stakeholder after its creation, it is not a requirement.
Before you decide if a DAO is right for you, consider reading our introductory article on DAO's to get more information on this specific type of entity. Under the right circumstances a DAO can be an incredibly powerful tool, especially when set up in a way that minimizes the liability of individual stakeholders, but may not be the right fit for every situation.
By default, a DAO entity is considered a general partnership by the law. Although a general partnership still holds many of the core characteristics of a DAO including a decentralized governing body, multiple stakeholders, etc. members also have unlimited liability related to the partnership. This is standard of a general partnership, but is especially undesirable in the case of a DAO. Unlimited liability means that were there to be legal action against the DAO, there is a risk that stakeholders personal funds and property could be at risk.
This inherent risk exists doubly so when those investments may not have originated wholly from the investor (like in the case of a DAO, where investment decisions are made by the group). Although DAO's traditionally have sophisticated voting systems, there is always the potential for something unexpected to occur. In the event of one of these undesirable situations, being protected under the veil of a limited liability company is highly desirable.
It is always in the best interests of stakeholders to minimize their liability, and although a standard DAO structure may not accomplish this adequately, there are ways to accomplish this limited liability without sacrificing the unique functionality of a DAO structure.
We have updated this article to reflect CA rulings. To our client’s benefit, the court decided consistently with our estimations. In short:
The risk that a DAO will be considered a general partnership is no longer hypothetical. In 2023, a federal district court in California ruled that DAOs may be deemed general partnerships if certain elements of a general partnership are present: (1) the right of the purported partners to participate in the management of the business; (2) the sharing of profits and losses among the purported partners; and (3) contributions of money, property, or services by the purported partners to the partnership. See Sarcuni v. bZx DAO, No. 22-cv-618-LAB-DEB, 2023 WL 2657633, at *1 (S.D. Cal. Mar. 27, 2023).
A DAO LLC is a DAO that, when formed, is intentionally built as a special type of Limited Liability Company (LLC). This allows a DAO and its stakeholders to enjoy all the benefits of a DAO structure as well as the legal protection offered by an LLC. Although a DAO is not required to be a DAO LLC to function, the limited liability offered by the LLC structure is essential for the protection of personal assets outside any DAO investments.
As a responsible investor, it is highly recommended that the participation or creation of a DAO structure should be specifically a DAO LLC. Just as general partnerships are recommended against due to the unlimited liability they entail, DAO LLCs are preferred over regular DAO's. DAO LLCs function almost identically to LLCs in the eye of the law, excluding some additional requirements for DAO specific features such as their governing structure and upkeep requirements.
Although the laws around DAO LLC's are constantly changing due to the technology being very recent, Wyoming has recently passed legislation supporting the DAO structure as an LLC entity. Wyoming also has a history of supporting the legal protections of LLC's under their jurisdiction and it is our belief that the same will continue to be true for DAO LLC's.
Although DAO LLCs are a recent technology, they serve a unique purpose in a powerful way. If you think a DAO LLC may be right for you, consider reading more about DAO's here or scheduling a call with one of our attorneys to decide the right option for your needs.